More than a savings product, life insurance is an attractive device, excluding inheritance, which allows a large part of one's assets to be passed on to designated beneficiaries. The beneficiary clause, an essential element of the contract, reveals all its importance. It aims to faithfully respond to the last wishes of the insured.
How life insurance works and its advantages during a succession
Life insurance is a contract whereby an insurer undertakes in return for the payment of premiums to pay a capital or an annuity to the insured at the end of the contract or to the beneficiaries designated by the insured when the latter dies.
At the end of the contract or on the death of the insured, beneficiaries and subscribers can thus recover the sums invested, incremented by any gains and reduced by various management costs.
Life insurance is a medium and long term savings product, available for withdrawals at any time and which can be closed freely without waiting for the term. From a tax point of view it is better to save for at least 8 years.
Life insurance and its many advantages
- It offers the possibility of building up capital over the long term which can be withdrawn in its entirety with the amount of net interest. As long as it is an investment in euros, the subscriber is guaranteed to recover the full amount initially invested. Nowadays, it is no longer possible to have a new 100% euro fund investment. The goal of a good wealth manager, in order to complete the guaranteed part, if your profile is very conservative, is to select a prudent allocation (such as real estate for example) in order to minimize the risk. If the contract is in units of account, that is to say based on financial media whose value fluctuates according to the stock markets, the beneficiary has no guarantee on the capital invested. On the other hand, profitability is often higher in the long term.
- It allows you to supplement your income during retirement, for example. The capital can also be transformed into a life annuity.
- Life insurance is also an excellent tool for optimizing wealth because it entitles its transmission to a very attractive tax on inheritance tax.
What is the beneficiary clause in a life insurance contract?
In a life insurance contract, the beneficiary clause is called the provision relating to the persons chosen by the subscriber to receive the capital on his death or at the end of the contract. The beneficiary can be a natural person, affiliated or not to the subscriber, but also a legal person (an association, a foundation, etc.). The beneficiary can also be “one or more born or unborn child (ren). This beneficiary clause is governed by Article L.132-8 of the Insurance Code: designation and substitution of the beneficiary of a life insurance contract.
If the subscriber does not include a beneficiary clause in his contract, the tax advantage provided in the event of death will be lost and the amount invested will fall back to inheritance law (Article L.132-11 of the Insurance Code) according to the rules of common law. The absence of a beneficiary clause thus deprives of the possibility of favoring an heir or a third party.
The capital was formerly totally non-inheritance. Since then, various reforms have made life insurance partially taxable. Part of the capital can therefore be taxed according to:
- From the date of subscription of the contract
- The age of the insured subscriber at the time of joining the contract and the repayments made
- The amount of capital transferred on the day of death.
In general, when the payments take place before the subscriber's 70th birthday:
– The sums transmitted are exempt from inheritance tax up to € 152,500 per beneficiary and beyond a flat rate of 20% up to € 700,000 (or € 852,500 transmitted). A levy of 31.25% is exerted beyond this amount.
When the subscription takes place after the subscriber's 70th birthday:
– Inheritance tax is exercised after deduction of € 30,500. Interest is exempt from inheritance tax (excluding social security contributions).
The PACS or married spouse is totally exempt in all cases (Tepa Law). So be careful to use the clause in a subtle way and maybe use it for other beneficiaries who are taxed (children for example).
The different beneficiary clauses: The importance of choosing the beneficiary clause of your contract
The life insurance contract makes it possible, as we have just seen, to designate the beneficiaries who will receive the death benefit (invested capital + interest). Remember that it is important to designate at least one beneficiary to avoid seeing the contract reinvested in the estate assets.
The standard clause: It privileges only the surviving spouse
Subscribers generally opt for the standard clause, a default clause, which reads as follows: “My spouse, failing which my children, born or to be born, in equal parts between them, living or represented, failing which my legal heirs according to the rules of inheritance devolution”
This standard clause means that at the time of the subscriber's death, only the spouse will benefit from the contract. You must therefore be careful not to choose it by default, if you want other beneficiaries to receive part of the life insurance and in certain proportions. The standard clause therefore often deserves to be personalized to respond more precisely to the wishes of the subscriber.
Care should always be taken to designate the spouse by his capacity as such. Otherwise, if the spouse is designated by name, and if it is no longer the same on the day of death, it is unfortunately the one named in the contract that will benefit.
The clause with distribution or dismembered clause
The distribution clause is the best solution to favor one or more beneficiaries. It allows, after nominating the beneficiaries, to determine the distribution percentages for each, with a total of 100%. Thus, the subscriber can decide to give 30% to one beneficiary and 70% to another beneficiary, or bare ownership to one beneficiary and the usufruct to another.
The distribution clause can be worded as follows:
Madam / Mister First name / Last name, born in …………… on dd / mm / yyyy living in ……… .., for 70%
and for the remaining 30%, Mr. / Mrs. First name / Last name, born in …………… on dd / mm / yyyy residing in …………
The clause with charges
The clause with charges stipulates that in order to claim payment of the death benefit, the beneficiaries will have to respect certain wishes of the deceased. One of the most common is to take care of your pet. It can also relate to the education of children, etc.
How to properly draft your beneficiary clause and protect yourself from abuse?
The policyholder may take out life insurance for the benefit of a third party other than the natural heirs. The excessive nature of these premiums may, given the capabilities of the insured, lead to his impoverishment and be assimilated to embezzlement or theft of an inheritance. The sums invested will be reintegrated into the estate, if the payments made on the contract prove to be manifestly excessive in relation to the assets or income of the insured.
In another register, the subscriber, elderly and vulnerable, may be tempted, under the influence of an interested person, to modify the beneficiaries of the contract and favor one of the heirs, a neighbor or even a new companion … You should know that the subscriber is entitled, until before his death, to designate and possibly change the beneficiaries of the contract or the distribution of capital between them. Damaged heirs will have two avenues of action to contest a late change of beneficiary. They may invoke either a vitiated consent, an absence of consent or even an incapacity at the time of this change of beneficiary (ies) as a person under guardianship.
The subscriber is not required to pass on his assets to his spouse (ex-spouse) or his descendants (children). However, abuses have led more and more injured heirs to appeal to the courts to take legal action to assert their rights. To do this, they must prove the abusive nature of the payments made on life insurance.
DLCP advisers are available to those interested in taking out life insurance. Support, answers on the choice and drafting of complex beneficiary clauses with solutions adapted to each situation!